Tech – CRE’s biggest customer

Tech has created an economic revolution. And it’s here to stay.

December 07, 2017

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Contributors:

Julia Georgules

Nope, it’s not a bubble. It’s a complete shift in our economy toward innovation, technology, mobility and agilit.It’s a question we’ll probably never stop hearing about the tech industry – are we in a bubble or not? Are the valuations crazy or are they the new norm? How can unprofitable companies keep growing rapidly without creating risk? How long can this continue?

Albeit a little tiresome, these are all legitimate questions. The dot-com bust burned lots of people and the scars haven’t fully healed. Since 2009, we’ve been trying to assure investors that this is not a dreaded bubble. But really it isn’t!

It’s different this time.

For starters, we can be comforted by the fact that society has grown pretty reliant on the technologies that some feared contributed to bubble conditions. And the dependency on things like mobile phones, cloud services and ecommerce certainly isn’t going away. If anything, it’s going to grow and tech will continue to infiltrate everything. As a result, the industry continues to be the prime consumer of office space across the country, gobbling up talent and large blocks of space wherever possible, and driving economic growth from San Francisco to New York and everywhere in between.

So is this a bubble? Nope. It’s an economic revolution.

It’s a complete shift in our economy toward innovation, technology, mobility and agility. The proof is in the industry’s spread into markets across the country, not just the major hubs. Some might argue that in the face of a downturn the tech industry retreats from these smaller tech markets. But why? Our economy has undergone a complete transformation, and it’s not done yet. We expect it to continue everywhere to varying degrees.

What does this mean for tech companies?

Unlike the tech industry of the dot-com days, today’s tech companies have many more viable locations to consider. And while the legacy suburban tech campus is still alive and well in major tech hubs, it’s no longer the only way to grow. San Francisco and Seattle have both been major beneficiaries of urban expansion during this cycle and urbanization trends have contributed to the growth of tech clusters everywhere, as more of the workforce chases new markets for lifestyle and cost of living, and employers chase talent to those markets. As a result, smaller markets are benefiting and fostering niche specializations like fintech in Atlanta or robotics in Pittsburgh, to name a few. What this volume of leasing activity really tells us is that the industry is not just growing and planting roots, it’s becoming a more integrated part of the fabric of a local economy.

What does this mean for owners and investors?

For the investor community looking to capture a fast-growing or big-name tech tenant, it means they aren’t stuck only looking in the Bay Area. They can ride this tech wave in virtually any market. But buyers beware. Leasing trends may show strong tech growth, but the promise of this rate of growth continuing for the next few years is unlikely given current and future employment conditions. With unemployment at historic lows, it’s going to be much harder for tech companies (or any company) to grow the way to the way they have been over the previous 10 years. Because the tech industry has been one of the few industries responsible for organic occupancy growth across markets, it means that further rent growth will become harder to achieve. Investors should not be concerned over the long term, though. With tech permeating virtually every local economy, the outlook for many metro areas is a promising one.